February may have left with a whimper but March roared in like a lion with strong gains across the board.

Market Statistics

The first week of March produced some very strong gains with a 3% average across the board. However, as you can see from the graphic above there were some real standouts with the Russell 2000 gaining nearly 6% and the biotech sector nearly 13%. This is even more amazing when you realize that Tue/Wed/Thr were basically flat days in the market. Monday started the week with a big gain but it was a fight to hold those gains for the next three days. Basically this was a two-day rally with a lot of angst in the middle as traders waited for the payroll report.

S&P-500 Chart

The February Nonfarm Payroll report showed that the U.S. lost 36,000 jobs compared to recent estimates of 50,000-75,000 job losses. Most of the job losses were in construction and most were due to the three snowstorms that blanketed the northeast. The unemployment rate was unchanged at 9.7% and most analysts had expected it to rise by several tenths. Household employment increased for the second month.

January's job losses were revised slightly higher to -26,000 from -20,000. The December job losses were revised lower to 109,000 from 150,000.

Construction posted the biggest losses of 64,000 jobs and weather was the primary reason. Temporary agencies added 48,000 jobs inline with the prior two months. Temporary hiring is a good leading indicator of overall hiring.

Household employment increased for the second month with the addition of 308,000 jobs. The household survey has shown over 841,000 jobs were created Since January 1st but this data never reaches the public. The number of people joining the labor force also increased slightly. The labor force participation rate rose to 64.8% but that is still below the pre recession level of 66%. The percentage of industries hiring rose to 48% and the highest level since 2008. Over 55% of manufacturing companies are either adding to payrolls of keeping employment level.

According to the separate household employment survey 6.3 million people worked either part time or not at all in February due to weather related issues. That is the fourth highest on record.

Without the weather related losses in manufacturing and losses in the government sector the economy would have added 46,000 jobs for the month. Census hiring was expected to have added significantly in February as they ramp up to 1.1 million workers in May/June but the campaign is getting off to a slow start and there was little hiring in February. David Darst with Morgan Stanley said without the impact of the weather and some confusion from the census hiring the number would have shown a gain of 100,000 jobs.

After seeing the internals on Friday's reports I am expecting a minimum gain of 100,000 jobs for the next three months. When the census really kicks off that could jump to 250,000 or more. The expectations for this hiring suggest the economy is really recovering and the possibility of a second recessionary dip is becoming remote.

Nonfarm Payroll Chart

The Consumer Credit report for January showed that outstanding credit rose to $2.456 trillion, an increase of $5 billion. That was the first increase in consumer credit in 12 months. Revolving credit continued to decline with a -$1.7 billion drop but non revolving credit rose by $6.6 billion. This was the largest increase since April 2008.

Rising rates on auto loans to an average of $3.94% did not deter car buyers. The average auto loan fell to $29,370 with an average loan period of 63.5 months. Credit balances should continue in the coming months as the auto sales pickup during the spring. This will offset declines in credit card balances as consumers cope with the higher payments and fees and lower credit lines on their credit cards as a result of the new CARD law that went into effect on Feb 22nd.

Consumer Credit Chart

There were no other economic reports of note on Friday and there are none next week either. The economic calendar is so devoid of material events there was nothing to highlight. The Wholesale Trade and International Trade are both severely lagging reports for January and they should be ignored by traders. The Consumer Sentiment on Friday will only be important if there is a big decline in the reading to match the decline in the Consumer Confidence report. I doubt that will happen.

The light economic calendar and no material earnings reports means traders will be influenced more by political events and sound bites than by fundamentals. This would be a perfect week for an unobstructed move higher with nothing to get in the way economically.

Economic Calendar

In stock news Apple Computer (AAPL) rallied +8 after announcing the iPad will hit U.S. store shelves on April 3rd. Apple rallied to $219 and an all time high on the announcement. Apple said the device will initially be sold in the U.S. but expand to nine international markets by the end of April.

Canaccord Adams had warned that there could be problems in delivery and the dates could have slipped. There were worries that manufacturing the new device in quantity could be a bottleneck for sales but those worries have now eased. The 9.7-inch screen device is all new technology and the most awaited device since the iPhone release in 2007. Those who want to buy the G3 cellular version will still have to wait until late April. Beginning March 12th consumers will be able to preorder either version on Apple's website.

Research firm iSupply is estimating the cost of materials in each device is $219.35 with a $10 assembly cost. Apple will not make as much on the first models delivered because these are the WiFi models and don't have a monthly revenue kickback from AT&T. The 3G cellular models will not be available until probably May 1st. Apple is also expected to announce a new iPhone in the June/July time frame.

Apple Chart

Coal companies rallied after a Chinese company agreed to pay BHP Billiton $200 per ton for coking coal in a three-month supply deal. The most recent anticipated price was $150 per ton and the spike in prices is a sign of the rapidly rising demand in China. Even with coal prices rising sharply China has become a black hole for coal consumption. The BHP deal will raise prices by other companies around the globe.

Coal companies also rose on news that India's Essar Group was buying West Virginia based Trinity Coal for $600 million. Trinity operates 13 mines in WV and Kentucky. The deal includes 200 million tons of reserves with half of it metallurgical grade suitable for making steel. Patriot Coal (PCX) gained +13%, James River (JRCC) gained +10%, Massey Energy +6% and BHP added +4%. PCX and BTU were recently profiled as top picks by several brokers. Based on Friday's news and comments from several coal companies about rising demand I would be a buyer of any coal exporter like BTU on a pullback.

GM said it will begin notifying some of the 1,160 dealers who disputed the cancellation of their franchises and filed for the congressionally mandated arbitration. GM had planned to close 1,300 dealerships as part of its bankruptcy program in an effort to return to profitability. GM said it was offering 661 of those dealers who went through arbitration the option to remain a GM dealer.

GM is still in settlement talks with 500+ dealers who will not be invited back into the fold. By keeping those 661 dealers GM is attempting to recover some of its market share that is currently being taken by Ford and foreign automakers.

GM was pruning its dealer network in an effort to keep multiple GM dealers in the same geographic area from being forced to compete with each other on the same models. If all 661 dealers were reinstated there would be 4,800 dealerships selling the remaining four core brands of Chevrolet, Buick, Cadillac and GMC. The government owns 60% of GM after investing $65 billion in the company to keep it from failing.

Hewlett Packard (HPQ) said it was restating earnings for the last quarter by three cents because of a lawsuit it inherited from the EDS acquisition. HPQ said a recent ruling could force the EDS subsidiary to pay out another $112 million to British Sky Broadcasting (BSkyB). EDS had already paid $320 million in 2004 over a dispute related to a customer management contract. HPQ said it was going to appeal the ruling. With the restatement the quarterly earnings would drop to 93 cents from 96 cents. HPQ bought EDS for $13.9 billion in 2008 and inherited all of EDS problems as well as its assets. HPQ gained 52-cents on Friday.

China also helped to boost the markets on Friday after the Chinese Premier said his country is on track for 8% growth in 2010 and the country will continue its stimulus program to ensure solid growth. China is expected to increase its demand for oil by 8-10% in the first half of 2010. China is ramping up its commodity search despite having massive stockpiles of almost every raw commodity.

China said last week it was concerned about the rapidly rising price of commodities. When you have the fastest growing economy on the planet it takes a lot of hard stuff to build buildings, roads, cars and nearly every commercial product made. It all starts out as some kind of ore and ends up as steel beams, computers, pots and pans, appliances, big screen TVs, interstate highways, airplanes and thousands of other products.

In response to the Chinese comments all the commodity stocks rocketed higher. Brazilian miner Vale (VALE) is already raising prices more than 90% for iron ore sold to Japan's JFE Steel. Brazil's Valor newspaper said JFE was willing to accept the proposal. The industry publication Steel Business Briefing said on Thursday that Vale was hiking prices by 40% in both March and April for ore sold to two other steel makers. VALE stock rose +1.14 on Friday, Nucor (NUE) +1.05 and SCHN +2.18.

Chart of SCHN

Not everyone believes the China story of booming economics. Some are pointing to the lower electric power generation as a sign that manufacturing is not running at the frantic pace they claim. Another news item out on Friday also threw a blanket on the expanding economy claims. Reuters in Beijing reported on Friday that China's top refineries will cut crude runs in March by 5.6% from the record rates in February. The top 12 refineries accounting for more than a third of China's crude capacity, plan to process 2.175 mbpd in March. That is 161,000 bpd less than February according to a Reuters survey.

The reason given was to curtail swelling product inventories. China had earlier reported in February that the refineries had been running at record levels as signs of an economic recovery began to appear. Reuters also noted that "the supply build appeared to have outpaced demand growth, as inventories of refined products rose for the third month in January despite months of rising fuel EXPORTS." Not only were they producing more products than were being used in China but they were exporting heavily as well.

With the developed countries still lingering in a recession and demand in China possibly not as high as reported the supply of gasoline is backing up in the pipeline and China is being forced to cut back on production. Granted, the blizzards in China over the winter severely impacted their motor fuel demand and supplies did pile up but they should be consuming those now if economic conditions are as strong as China reports. There is also a rumor that copper inventories in China are at seven-year highs. This bears watching in the coming weeks.

Crude Oil Chart

The Volatility Index (VIX) collapsed to 17.42 at the close and a level not seen on a closing basis since April 2008. As a point of reference the VIX hit 52 exactly one year ago Friday. The high was 89.53 on Oct 24th 2008. The collapse of volatility and deflation of option premiums had option traders increasing their recent activity to near record levels. On Friday over 15 million contracts traded compared to a normally heavy day around 9 million. With the collapse in option premiums and the spike in the markets the opportunity to buy cheap puts for protection against a market decline was something many could not pass up.

Options were also being used as an opportunity to cheaply capture some of the rumors in the market. For instance Nuance (NUAN) normally trades about 900 contracts per day. On Friday they traded 45,000 calls on rumors Google might make an offer for the company. This is not news. Nuance is regularly mentioned as a takeover candidate. This was a Friday with a strong market rally and Nuance just happened to be the rumor that got the most play.

VIX Chart

The problem in Greece appears to be over for the next few weeks. After enacting tough austerity measures designed to reduce their deficit they were able to sell euro five billion ($6.8B) in five year bonds for 6.3% interest. The bid to cover ratio was very strong at 3:1. You can bet there were some EU countries central banks placing bids to make sure the auction did not fail. That was the easiest way to solve the immediate problem. By guaranteeing Greece a successful sale it prevented any emergency bailout scenarios.

Germany's Chancellor was quoted as saying "Germany will not pay a single cent to Greece" when questioned about helping bailout Greece. Several German officials suggested Greece sell its islands to pay off its debts. Regardless of sentiment the Greece debt problem has been pushed 4-6 weeks into the future until it comes time to sell another 10 billion in debt and the entire sordid scenario will repeat.

The U.S. is not much better off than Greece according to the Congressional Budget Office and numbers released late Friday. The CBO said the presidential budget just submitted would generate deficits over the upcoming decade of $9.8 trillion. That is $1.2 trillion more than the president predicted. This does not include the new $1.2 trillion healthcare plan currently being discussed. The CBO predicts that debt held by investors, including Japan and China would spike from $7.5 trillion at the end of 2009 to $20.3 trillion in 2020. Interest payments would rise from $209 billion this year to nearly $1 trillion per year by the end of the decade. Again, that does not include the additional trillions that would be incurred if the healthcare plan were enacted. It is probably a good thing these numbers were not released until after the market closed on Friday.

The U.S. will auction over $210 billion in debt next week alone. Eventually the reality of the total U.S. debt is going to come home to roost and interest rates and inflation will go out of sight. There is no way the U.S. can continue to run up debt bubbles of this magnitude and continue to pay the bill. It is technically impossible without an economic boom of a magnitude we have not seen before and continue for the rest of the decade. They say the only two things in life that are unavoidable are death and taxes. In our current situation there is a third item and that is inflation. Without it the U.S. does not have a chance of reducing the deficit and I guarantee you Bernanke and others are well aware of that fact but will not admit it publicly.

Saturday marks the one-year anniversary of the bear market low on March 6th 2009. Has it only been a year? Seems like a lot longer to me. The graphic below lists the lows on March 6th, their levels today and the amount they changed. The statistics are amazing.

Index Changes

It is even more amazing when you realize there is more than $1.5 trillion in investable cash still sitting in money markets for safety. There is easily another $500 billion in bond funds. The bond funds have been the investment vehicle of choice for over a year now and every month sees tens of billions more sent to those funds. The trend is just now starting to change. If the indexes were to actually breakout to a new high in March the resulting return of that cash to equities over the following months could power the markets to another astounding record. The key word in that sentence is "could."

There are quite a few analysts and consumers that still believe in the second dip theory. Until those investors begin to believe in the market again that cash will stay safely invested in money markets and bonds. A strongly positive payroll report for March would be confirmation for many investors.

Until then we are going to be faced with the daily question. I am not talking about the double dip question but the double top question. The markets have returned to their January highs and this would be the perfect opportunity for some event to appear to appear and cause a real bout of profit taking given those massive gains in the graphic above.

What could cause that to happen? Who knows but lightning always strikes when you least expect it. The VIX is at a two year low and that means nobody is expecting anything but a move higher. We are back in a new version of the Goldilocks market. Not too fast, not too slow, economics are just right and improving. Everybody is happily going about their business as usual. If by chance we had a bond auction fail next week it would be the equivalent of a houseful of bears all showing up at exactly the wrong time.

I don't believe an auction will fail at least not this week. It will happen eventually but probably not until we are farther down the debt road to a point where even Homer Simpson can see the writing on the wall. Everyone will continue to believe that the U.S. can magically extract itself from the debt bubble until eventually the bubble bursts. Then it will be too late but that is a story for another time.

I don't see any potential catastrophe in the immediate future. Earnings are slowly improving. Retail sales are picking up. Auto sales are improving. Home sales will improve until April 30th and the end of the homebuyer tax credit. Jobs are improving. Despite those positive events the Fed is still on hold for several more months at least. It is the perfect Goldilocks scenario for the markets for at least the next six weeks. That will get us past the first couple weeks of the Q1 earnings season and to that time of year when markets typically weaken as we head into summer. That will be the real test. Did the March jobs really rise and did Q1 earnings improve on sales or another quarter of cost cutting? Is China really growing by 8% or was it a cleverly crafted ruse? Have oil prices advanced to the point where gasoline prices are putting the pressure on consumer spending again? Over $85 per barrel means gasoline over $3 again and we are really close to that $85 today.

I don't currently fear any of those events. I believe the glass is half full and we will make it into the Q1 earnings cycle without any major market disaster. I would like to believe we are entering into a new bull market but there are too many unresolved questions to know for sure. Until we do know for sure we should just keep taking it one week at a time and keep looking over our shoulder for storm clouds to form.

The Dow chart is a beauty to behold. The rally from the February low is a classic example of support and resistance. The resistance at 10300 became support when the Dow was caught under the intersecting line of resistance (dashed) and the 50-day average. For several days the Dow highs declined as the downtrend from the January high exerted pressure. On March 1st both the 50-day and the downtrend resistance was pierced and immediately the 50-day became support that provided a launch point for the late week rally. Rarely do all the components play out their roles so perfectly. Of course it is always easy to recognize in hindsight what was open to dozens of different interpretations as it was happening.

Dow Chart - Daily

I could take you to a dozen different analysts and show you everything from the perma-bear view of the last month to the perma-bull view. All prepared their analysis of the evolving market to perfectly fit their bias. Hopefully Option Investor has given you enough different views that you were able to see the multiple possibilities rather than a diet of one bland outlook.

The Dow rallied to close over 10550 and the next major resistance is the January highs at 10725, which is resistance dating back to July 2006. I believe we will break through that 10725 level as well. It may not happen on the first attempt but we will get through it. I got a kick out of a couple analysts last week talking about the Dow moving up to 11750 and then declining back to 10300 by year end. One of their targets was S&P 1250 then 1150 again by year-end. Their crystal ball is either much brighter than mine or they have the new and improved Avatar 3D models. I will just be happy to get through 10725 before too long and then worry about what level comes next. Support is currently 10400.

The S&P moved up a little stronger than the Dow and it has some serious resistance at 1150 that corresponds with the Dow 10725 level. The S&P appears to be picking up speed but that should be a solid wall at 1150 that will require multiple attacks to penetrate. At least that is my theory. That should be the perfect place for the shorts to wait in hopes of the perfect trade, a double top failure at strong resistance. Ideally the S&P should stall at 1150 for a couple days to seduce every short left into taking a new position at that level. Then give the bulls a solid piece of news that punches through that resistance and we could be off to the races as those shorts scramble to cover. That would be the ideal scenario but one I am not counting on. SPX 1150 should be decent resistance and 1115 is now support. Everything in the middle is noise.

S&P-500 Chart

The Nasdaq closed at 2326.35 and theoretically a breakout over the January high close at 2320 and the intraday high at 2326.28. In reality what you see is a dead stop on that 2326 resistance high. I would be VERY surprised if Monday's open was not lower. On the intraday charts you can clearly see the closing swell as short hoping for the end of day swoon finally threw in the towel and began to cover. The closing print was a short squeeze surrender. After the weekend to recover they should be back at it on Monday morning in hopes of that perfect short entry. Support is 2275 and a drop back to rest gives the bulls a solid platform for the next attack.

Nasdaq Chart

The Dow and S&P still have a ways to go to just reach the resistance highs. The Nasdaq is there but has not yet broken through. The Russell needs no qualification. It has broken through multiple levels of resistance in the last week and is clearly in full breakout mode. It is a new bull market for the small caps with the next material resistance in the 750-760 range. Since the Russell is our fund manager sentiment indicator I would say the rally is on!

Fund managers are backing up the truck and their biggest fear this weekend is not what will happen next week but whether or not their performance is going to be beaten by the S&P or by their competition. I believe that the big caps are lagging because fund managers are selling their "safe" big caps to switch to the potentially big gains that traditionally come from small caps.

On the Russell the prior resistance at 650 should now be support but given the trajectory of the Russell I doubt it will be used. Every dip for the last week has been used as a buying opportunity. With funds competing for performance in Q1 I suspect they will continue to be bought. For fund managers now it is all about the Q1 statements. How they did relative to the S&P and each other is how they will be measured in April. It is no longer about being safe but how much money did they make compared to their peers.

Russell Chart

Russell Chart - Weekly

The NYSE Composite Index consists of more than 2,000 companies listed on the NYSE, 360 of which are non-U.S. companies. It does not contain closed end funds, ETFs, limited partnerships or derivatives but all other listings are included. The index represents over $14 trillion in market cap and it is globally diversified with 20% of the stocks non-U.S. companies. The smallest market cap represented is $900 million and the largest $404 billion.

I am not giving you a sales talk on the NYSE index but simply explaining why I think it is a valid index representative of the entire market. Where the Dow and S&P are a large cap indexes and the Russell 2000 a small cap index and the Nasdaq a tech weighted index the NYSE Composite is a broad market index of all market caps, sectors and geographies. It is a true representation of the entire market. The Wilshire 5000 would be equivalent only the Wilshire only includes U.S. stocks.

I view the NYSE Composite as a strong indicator of market sentiment just like the Russell. Over the last week the NYSE broke over the 50 and 100 day averages and closed on Friday above the November resistance at 7250. I see this as confirmation of the Russell move. The next resistance level is 7450.

NYSE Composite Index

Since I mentioned the Wilshire 5000 I will show it as well. Ignore the title. Qcharts has a bug in the name. The Wilshire 5000 as an American market index is benefiting from the small cap rally and has risen more than the Dow/S&P towards the January highs but unlike the Russell has not yet broken out. The index is useful as an indicator of the broad market but I prefer the Russell as the LEADING indicator. I would rather know in advance of a market move rather than after the fact.

Wilshire 5000 Index

In summary, for next week I expect some potential weakness at Monday's open as the shorts try to reassert themselves. That of course depends on what happens overseas in response to our Friday gains and our jobs outlook. If the overseas markets explode higher then the shorts may not have a chance to exert pressure at the open.

Despite our Friday gains we spent most of the week with morning gains fading into the close. We need to see that pattern reverse with the markets rising into the close instead of falling. That will provide confirmation to the bulls that there are not a dozen funds with sell programs just waiting for the bulls to bet their last dollar so they can cut the legs out from under the market. I do expect the small caps to continue to outperform simply because the fund manager performance war has begun. The next three weeks should trend higher. Once into April all bets are off.

Volume remains a technical problem. Volume last week averages 7.7 billion shares per day. Monday's big gains came on 7.5B and Friday's rally on 7.9B. This is really anemic volume given where we are in terms of the index highs and in terms of economics. There is still a lack of conviction among investors. However, volume on Friday was 7:1 in favor of advancing volume. The A/D line was 4:1 with a huge number of new 52-week highs at 826 compared to only 46 new lows. That is the most new highs since the 1,048 on January 11th. If the internals continue to show that kind of strength the volume should increase sharply as those on the sidelines begin to worry about missing the train. Until then this will remain a low conviction rally and subject to increased bouts of volatility.

The economic reports next week are meaningless because they are mostly lagging reports for January. We should start seeing some mid quarter guidance updates from a few major corporations and hopefully they are positive upgrades. My guidance for traders would be to buy the dips to S&P 1115, Russell 647. I would favor energy stocks on dips in crude prices, miners on any dip and tech stocks on significant dips. I can't believe how much some of those tech stocks have gained in the last week. There is no way I would buy them without some profit taking first.

Jim Brown

I left you last weekend with a recommendation for a book on better health that I had just completed reading called the China Study. I received numerous emails from people who had already read it and praised it but I am only going to print one. The book deals with a proven method of eliminating and reversing heart disease, diabetes and cancer with diet. This email is from a long time Option Investor subscriber who himself is a doctor. The rest is self-explanatory.

Jim, I am a medical doctor by profession, and in June last year I found out I had terminal liver cancer with metastasis to lung. There was no therapy to cure my cancer but palliative care, in another words, I was waiting to die. I was devastated and at brink of death with severe weight loss and cough.

After I read "China study" and some other anticancer books, I completely changed to the recommended diet. In a short 3-4 months, my cancer completely reversed, and my cancer marker, AFP, went from 4000's to a normal value of 4. However, my oncologist remained skeptic that diet could change and reverse cancer, and brushed aside when I tried to recommend the book.

Jim, congratulations for recommending the book to your readers! It saved my life!

Other critical books on the subject include:

1. Prevent and Reverse Heart Disease by Caldwell B. Esselstyn

2. The Scientifically Proven System for Reversing Diabetes without Drugs by Neal D. Barnard M.D.

I lost a lot of income while I was sick last year, now I am healthy and back at work full time!

Sincerely,

Tim

If that does not convince you to read the books then I don't know what would. I have read the Esselstyn book and recommend it as well. Don't wait until you are sent home to die. - Jim

Here is the link again to the China Study by T. Colin Campbell:
The China Study: Startling Implications for Long-Term Health